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I have question.Took it kaplan SBR
On 1 January 20X1, Kingfisher enters into a four year lease of property
with annual lease payments of $1 million, payable at the beginning of
each year. According to the contract, lease payments will increase
every year on the basis of the increase in the Consumer Price Index for
the preceding 12 months. The Consumer Price Index at the
commencement date is 125. The interest rate implicit in the lease is not
readily determinable. Kingfisher’s incremental borrowing rate is 5 per
cent per year.
At the beginning of the second year of the lease the Consumer Price
Index is 140.Discuss how the lease will be accounted for:
? during the first year of the contract
? on the first day of the second year of the contractthere is a similar example in opentuition study text (Plum)
it is paid at the start of the tear why here 1mln is added to Asset but not liabiliry?in plum example it also added to asset as well as liability. in plum example 5000 paid at the start of the year. when discounted pv of lease pay 5000 added over the liability but in kaplan example it has not been added.very confusing.need explanation
Best I can say is that at the start of the lease:
Right of use asset = PV of FLP (three of them) plus initial lease payment
Liability = PV of FLP (three of them)
FLP = Future lease payments
(Please don’t copy out whole questions in this service – express the question in your own words)
Dear Tutor, let us first concentrate on plum example(open tuition note) and then the example in Kaplan study text.
lease pay-5000
lease contract year-5
payable -at the start of the year
the rate implicit-5%
fufute lease pay-22730since it is the start of the year we take 0-4 annuity (1+3.546)*5000=22730
debit asset-22730
credit-22730Kaplan example
lease pay-1000000
lease contract year-4
incremental borrowing rate-5%
payable at the start of the yearI solved it in the following way
since it is the start of the year 0-3 (1+2.723)*1000000=3723000
debit asset–3723000
credit liability—-3723000in the kaplan solution.
The first year
The first payment occurs on the commencement date so is included in the initial cost of the right-of-use asset:
Dr Right-of-use asset $1m
Cr Cash $1mDate ———-Cash flow ($m) ——–Discount rate——— Present value ($m)
1/1/X2 ————–1.0 ————————1/1.05 ——————–0.95
1/1/X3 ————–1.0————————– 1/1.05^2 ——————0.91
1/1/X4 ————–1.0 —————————1/1.05^3 ——————0.86
–––––
—————————————————————————————-2.72Dr Right-of-use asset $2.72m
Cr Lease liability $2.72m
they did not consider 0 year as it is the start of the year and it is the same example in the opentuition example.On 1 January 2015, Plum entered into a five year finance lease of machinery. The machinery has a useful life of six years. The annual lease payments are $5,000 per annum, with the first payment made on 1 January 2015. To obtain the lease Plum incurs initial direct costs of $1,000 in relation to the arrangement of the lease but the lessor agrees to reimburse Plum $500 towards the costs of the lease. The rate implicit in the lease is 5%. The present value of the minimum lease payments is $22,730
it is plum example.
years——-D.F———————C.F—————————-Pv
0————–1————————5000————————–5000
1-4———–3.546——————-5000————————–17730
==========================================22730in the prior example 1 million is not added over liability it is both paid at the commencement date or begining of the year.why if it is the same method of pay but different way of calculating.
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